How They Gained Monopoly Power

Friday, 13 April 2012

In the 1990s the hard copy book market in Canada changed
dramatically. Governments had not allowed large American book stores like
Borders to expand into the Canadian market in order to protect smaller stores;
This lead to the market being full of small, mostly independent book stores. However
two new chain stores named Chapters (1994) and Indigo (1996) opened and shifted
the market share enormously. Within the
space of only a few years the two retail stores became giants in the market and
were the only contenders for market dominance. The previous abundance of small
local book stores was pushed out of business by low prices and the massive
selection that these massive stores could offer. In 2001 the two book stores merged creating
the largest book retailer in Canada by far. Over the next few years the newly
created Indigo(now including Chapters) bought Coles and Worlds Biggest Books
giving it almost complete market share in Canada through its 88 super stores
and 179 mall based stores. Indigo
continued its run of success with ever increasing revenues and net income gains
resulting in 1 billion dollars total revenue in 2008. This prompted John Lornic
to write that "no other sizable developed country has let ownership of
bookselling become so concentrated." He even stated that Indigo was,
"The closest thing to an unregulated monopoly in Canada's private
sector." However the entrance of
Amazon into the Canadian market in 2006 (which was strongly opposed on the
legal ground that American owned book retailers could not operate in Canada) lead
to Indigo losing some of its Monopoly power. This power was further reduced in
2009 when the kindle, Ipad, and other Ebook fridly hardware companies came out with
reading tablets leading to the digitalization of books on a massive scale. No
longer was Indigo the sole supplier of books in Canada, thanks to the
completive prices offered by digital books and Amazon, Indigos monopoly power
was smashed.

Characteristics

In this segment Indigo will be examined in order to determine if
indigo met the criteria of being a monopolistic firm during the height of its
in 2006.

1. The only seller
of a good or service

·Indigo was the only major retailer
with more than 4 locations in all of Canada

·The only competition was
individual book stores or very small chains such as tattle tales

·Large American book stores could
not enter

Verdict: Not the only
seller of books but took up the majority of sales: impure monopoly

2. No viable substitutes
exist

·Were a very small number of small
chains

·Were a small number of small single
book stores

·This was before online book
sellers like Amazon existed in Canada

Verdict: A few viable
substitutes: impure monopoly

3. Monopolists are Price
Makers

·Indigo relies on low prices to
prevent firms from entering the industry therefore they have little control on
prices over a certain amount

·They did not worry about losing
customers to small individual stores that could not advertise small prices or
set prices due to their high cost of production or buying the books

Verdict: had non monopolistic
ability to change price

4. Significant/Total
Barriers to Entry Exist

·Indigo had created a tough
environment to enter due to its brand recognition and dominance over prices

Finial Verdict: Indigo is the type of Monopoly that is
a firms responsible for the majority of sales in a market

Control of
Essential Resources

·The resources needed to make the books that
indigo sells are not under indigo’s control

·All these materials such as paper, printers
and the ability to purchase the rights to books from publishers are available
to most small book stores

·Also there is an unlimited amount of areas where
book stores are able to be created

Legal
Barriers

·There are no legal barriers preventing a book
store from entering the market in Canada

·There are also no financial restrictions
placed on entering the book retail industry by the government

·One major legal barrier that has allowed
Indigo to thrive was the law preventing American owned book retail companies
from entering the Canadian market

·It was this law that originally prevented the
large book stores like Borders from entering the Canadian market creating a
demand for more books

·This demand lead to the original success of
Canada’s first major book retailers Indigo and Chapters

·This Law still prevents American owned book
sellers from breaking Canada’s monopoly

Pricing
Strategy

·Indigo prices its books significantly lower
than any potential competitor in the material book industry would be able to

·This was how Indigo was able to drive previous
competitors out of the market

·An example of another firm who was pushed out
of the industry by this competitive pricing strategy was Litchman’s which filed
for bankruptcy due to its inability to produce enough revenue while staying
competitive with Indigo’s pricing

·This was the largest independent bookstore in
Canada and it failed to continue running, with this in mind it is clear that no
other bookstores could compete with the corporate monster which is Indigo

·Indigo is able to place these low prices because
of their size

·With huge amounts of retail locations across
the country, Indigo has the ability to profit greatly off of smaller profit per
unit amounts

·Unlike other monopolistic firms, Indigo is
unable to use their monopoly to increase the price of books due to the
necessity for competitive pricing which keeps other firms out of the industry

·This makes them less profitable than they
would be if there were distinct entry barriers into the industry and Indigo was
the only viable option

·The firms average total cost is not a huge
amount lower than other firms, but does instill a competitive advantage for
Indigo

The loss
of Indigo’s monopoly

·Due to the up and coming Ebook technology,
indigo’s monopoly over the book market has been almost fully taken away

·Currently, a person is able to buy an Ebook
for a significantly lower price than buying the hard copy of a book

·This is understandable due to the lack of
costs associated with producing an Ebook (simply licensing and software design)

·The situation that indigo currently faces with
the Ebook is very similar to the that independent firms previously faced with
indigo

·Because indigo would no longer be profitable
selling their books at the low price which is offered for an Ebook, they are
unable to price competitively and thus will lose a large chunk of consumers who
are looking for a ‘better buy’

·From a monopolistic point of view, Indigo
could arguably still be a monopoly in the HARD COPY book market

·Looking to the future, this market is not very
profitable with increasing technology and access to Ebooks

·The graph below displays the sales compared to
the change in profit

·As you can see, the sales of Indigo increased
as the lowered prices attracted a larger quantity demanded, but the actual
profit decreases due to the smaller profit per unit

Conclusion

In conclusion Indigo has enjoyed a successful decade as near
perfect monopoly with control over the Canadian market for books through its
ability to buy books in bulk, set prices and compete in a market were American
firms cannot enter. However in recent years this monopoly has ceased to exist
due to the introduction of Amazon in to the market as well as the mass
digitalization of book which have made hard copy books near obsolete, much like
how albums became obsolete when music went digital. In the future Indigo will have to continue
attempting to branch into different markets like the toys and games market as
well as the gift market because their main product books is losing value fast.

Google Inc. is an American internet and software company built around a
search function. Google hosts and develops a number of other internet based
services and products and has acquired a large number of firms in order to maintain
control over internet users. Google was founded by Larry Page and Sergey Brin at
Stanford University in 1998. In 2012 a study estimated that there were 33,077
employees working for Google. The year before the company was valued at US$
37.905 billion.*1

History of Google:

Legal Barriers to Entry

Within the online services business, Google has control over a huge number of other products and is most well-known company of their kind. Google mainly uses patents and
acquisitions in order to keep others out of their industry. Throughout the
years Google has been acquiring companies in order to keep them out of
their industry along with others in the business like Bing and Yahoo. In recent
years Google’s acquisition of Motorola increased their patent block by
17,000. Although Google has not released the amount of patents which belong to
them, it is projected that they have hundreds of thousands. Google’s position
in the industry is extremely highly regarded and monopolistic. It is said that,
“Google upholds the position as the dominant search engine in the world, with
65 percent of the total search market.”*2

On top of patented products, what keeps consumers coming back to Google
is their competitive ability to develop infrastructure that guarantees clients fast and efficient services such as search, video streaming, maps, news,
translation, advertising and much more. These services expand to meet the needs
of the online community. Google strength lies in its constant state of rapid
growth and adaptation, “Google's advantage over competitors is its rapid
speed.”*3

Google’s main claim to fame is its branding. Google has become
one of the largest and most well-known companies in the world with zero
advertisement. Google's popularity has been established solely from word of mouth
over the years. This is an important aspect as to how Google has branded
themselves. This strong brand name is another significant barrier to entry
against competing companies because it is so hard to enter into a market where
everyone knows and likes the product they currently use.

Control of Essential Resources:

Google’s innovative and top notch services continually adapt to what the
online community desires. They have made it clear that their intellectual
capital and programmers are the secret formula behind their success. The
infrastructure that Google has created over the years can be credited to their
programming team, who have become known as the best in the industry. Another
essential resource which proves noteworthy is Google’s ever growing list of
acquisitions. There are too many acquisitions to list but below there is a link
which states all acquisitions since 2001. These acquisitions are essential to
Google’s online dominance. In acquiring different sorts of companies, Google is
able to use patents in which they couldn't use before. With each acquisition
they acquire more intellectual capital and more patents.

Google’s revenue is derived from practices which completely ignore
typical business strategy. Much like Facebook they provide top notch services
for free, in order to gain high traffic. They then advertise to this massive
base of users; ads are the foundation of Google’s profitability*4. They
obtain and even create advertising space in the following ways.

ADsense:

AdSense is a free program that lets online site publishers earn revenue
by displaying ads on a wide variety of content. Google takes advertisements and
chooses which ones should go on which sites, paying site owners based on
traffic.

Adwords:

Adwords sells the advertisements that show up beside search results.
Advertisers pay per click and can choose where their ad appears.*5

DoubleClick:

Google acquired Double Click, an online “advertising serving” service,
in 2008. Google charges a commission to takes ads and distribute them onto
sites that they have contracts with. They pay these sites a portion of the
revenue. Sites will chose this over independent advertising contracts because
it is more consistent and reliable. They also provide users with the ability to
make their own ads. Includes Adsense but adds on data management
service for site owners.*6

Expansion:

Google has continued to expand the number of web properties they own and
has consequently increased ad space available for sale. They own many websites
including Youtube, Blogger, Deja, ect. They have also created advertising
spaces through their own products such as Gmail, Google maps and many other
Google services. All of these are heavily used and are therefore valuable
advertising assets.*7

While searching:

Google has also focused on presenting its ads in a discrete way which
separates them from other internet ads. In a Google search the ads are
displayed in a very similar format to that of the normal search results. Take a
search for books for example:

*8

The first result that appears is Apple’s bookstore, then a Wikipedia
explanation of what a book is and then Google’s free book library. The ad for
Apple is very similar to the rest of the links. It is highlighted and
identified as an ad but it has the same font, format and size as all the other
links on the page. This establishes the ad as a viable source instead of a
distraction. The sense of viability of the ads is strengthened
by the fact that the viewers are searching for what they see ads about.

Has the Company been able to maintain its monopoly power?

Google’s constant innovation and many acquisitions keep users on their sites and subject to their advertisements. The have a huge patent bases allowing them to access premium building blocks for their sites, they have the best intellectual capital and the most competitive advertising pricing strategy. These three elements allow them to hold their monopoly over others in the industry.

The National Football League (NFL) has been a topic of discussion over the past couple years. While football is the primary topic, another topic has been whether or not the NFL is a monopoly. The claim comes from the NFLPA, who claim that the NFL uses its league powers to prevent player salaries from escalating.A monopoly is a commodity controlled by one party. In this case the commodity is professional football and the party is the NFL.An example of a monopoly is the LCBO. In Ontario, alcohol can only be sold by the LCBO.It is run by the government and it is the only licensed liquor supplier in Ontario. No other business or individual can sell liquor and therefore the prices are not set by the market.The Ontario government is the party that controls the commodity—alcohol.The NFL claims that it is not a monopoly and says that it is a cartel.A cartel is a formal agreement among competing firms. It is a formal organization in which producers and manufacturers agree to fix prices, marketing and production. Cartels, unlike monopolies are legal.

The National Football League is the highest level of professional American football in the United States and to most it is considered the top professional football league in the world. The creation of the NFL dates back to the early 1900’s.In 1920 several representatives of many professional American football leagues and independent teams founded the American Professional Football Association (APFA). The APFA contained only 11 teams and it was soon renamed the National Football League which now contains 32 teams. The teams are an amalgamation of eleven teams from the APFA, three teams from the All-America Football Conference and the remaining 10 teams were from American Football League. The NFL and AFL merged in 1960, greatly expanding the league.This led to the creation of the Super Bowl, the Pro Bowl and other divisional championships. Today, the National Football League is among the most attended domestic sports league in the world with an average attendance per game of 66,960 fans.

There is heated debate in the business and legal community as to whether the NFL is a monopoly or a cartel. In the private sector monopolies are illegal and therefore the National Football League claims it is a cartel. It is a formal organization with 32 separate companies that are free and operate under a governing body (the NFL).The league allows teams the freedom to set their price for the tickets or anything sold within their stadium. For example, any NFL owner can charge as much or as little as they want (parking ticket, souvenirs, refreshments, etc.).Additionally, the league allows teams to compete for players.Teams are not allowed to get together and determine a salary cap for a player or a position. The NFL is an open market and the owner is allowed to determine a players worth.As a result, the NFL claims that it is not a monopoly and in fact, a cartel.

There are, however some who believe that the NFL is in fact a monopoly. In mid-June 2009, American Needle sued the National Football League for being a monopoly. American Needle Inc. was one of the former hat suppliers of the NFL teams.There contract was with some of the teams and was negotiated on a team by team basis.This relationship existed until the NFL signed a contract with Reebok.The Reebok contract was for the supply of hats for every NFL team.As this contract was league wide, it eliminated all American Needle business with the NFL. American Needle sued the NFL and claimed the league violated the antitrust laws, acting as a monopoly.Needle stated that all 32 teams worked together to freeze it out of the NFL-licensed hat making business, signing an exclusive 10-year license with Reebok. Another reason people may view the NFL as a monopoly is because of its television license. The television rights to broadcast the NFL games are the most lucrative and expensive rights of any American sport. Currently, the NFL has made agreements and signed contracts with television networks such as CBS ($3.73B), NBC ($3.6B) and Fox ($4.27B) as well as ESPN ($8.8B) which is a combined total of $20.4 billion to broadcast all NFL games. These agreements and contracts come into question when deciding whether the National Football League is in fact a monopoly or not. With these two situations it seems as though the NFL has taken matters into their own hands and signed contracts and made agreements which controls the entire 32 teams instead of each team being individual competing corporations.

Why can’t each team sign with whichever network it chooses? Why can’t each team be sponsored by whoever they want? Why isn’t each team making unilateral decisions? These questions still remain and given the evidence given above, there are many who believe that what the NFL is a monopoly and in violation of the Sherman Antitrust Act. Without the antitrust restraint, the league would be able to kill free agency and restrain the competitive bidding amongst teams for the best players and coaches. It would also allow the league to dictate the prices and prevent teams in the same market for competing for fans by offering discounts. In conclusion, it would allow teams to act in concert to require that all sales of tickets in the secondary market be channeled through a brokerage system owned and licensed by the league.

Now this brings us to one last question: Is the NFL a monopoly or not? How can the NFL change their course of actions so that they are still able to sign agreements and take matters into their own hand without being criticized, and accused of being a monopoly? The answer to our final question is that the courts have declared that the NFL is a cartel but in some situations can be viewed as a monopoly.Each team has control over the way they operate, what they sell at concessions with the exception of clothing articles and TV contracts.In our opinion, the NFL clearly controls the commodity of football and is therefore, a modern day monopoly.

By: Sam Sutcliffe and Timmy Robinson

Who is Luxottica?

Luxottica is the world’s largest eyewear company. It produces both sunglasses and prescription frames for a multitude of designer brands including Oakley and Ray-Ban. The firm was started by Leonardo Del Vecchio in 1961 in the north of Italy. Del Veccchio lived in Milan and had been trained as a tool mater, but soon turned to metal working and the production of spectacle parts (Group, Comapany History ). In 1961 he moved to Belluno, the home of the Italian eyewear industry, where he formed Luxottica as one of the founding partners. The firm began by producing and selling complete eyeglass frames under the Luxottica brand, a move that proved to be profitable. Convinced of the need for vertical integration, Luxottica began purchasing distribution companies while setting up international subsidiaries in order to expand internationally. In 1988 they began negotiating licensing deals with many sunglass designers (Group, Comapany History ). The company currently has the eleven prestigious house brands, whilst creating eyewear under license for fifteen designer labels. Through the vertical integrate process; they own many retail stores for their goods including the Sunglass Hut, Lens Crafters and Ilori(Group, Comapany History ).

Currently, 64% of the adult population is in need of vision correction, of that, 63% of those who need vision correction, use glasses as opposed to contacts or vision correction surgery. Eyeglasses seem to be a near inelastic good, with Luxottica providing the supply for the ever constant demand of society.(America, 2006 )

Licensing

One of the reasons that Luxottica has created a near monopoly over the sunglass industry is due to its licensing agreements with sunglass designers.The firm began by producing and selling complete eyeglass frames under the Luxottica brand.In 1988, the company began negotiating licensing agreements for designer brands like Oakley to Ray Bans.Luxottica was the first sunglass company to sign licensing agreements with designers, giving them a significant advantage over the competitors.

Luxottica expanded on this strategy and began aggressively seeking out and negotiating licensing agreements with many major sunglass designers.Currently, the company has a host of house brands, including Arnette, K & L, Luxottica, Mosley Tribes, Oakley, Oliver Peoples, Person, Ray-Ban, Revo, Sferoflex and Vogue. Whilst the company creates eyewear under license for designer labels, such as Brooks Brothers, Bulgari, Burberry, Chanel, Chaps, Club Monaco, D & G, DKNY, Miu Miu, Ralph Lauren, Prada, Tiffany & Co., and Versace. Luxottica’s contracts with the major designers give it a dominant position in the market.

Competitive pricing strategies

Luxottica has worked to maintain an effective degree of monopoly over the sunglass industry through its use of pricing strategy.The effective pricing strategy can be attributed to two key characteristic, vertical integration and computerization.Convinced of the need for vertical integration, Luxottica began purchasing distribution companies while setting up international subsidiaries and retail stores in order to expand internationally.This gave Luxottica complete control over the product from production to retail.

Del Vecchio pushed the implementation of computerization, resulting with the integration in all facets of the industry’s process, from design to manufacturing to inventory control.This early application gave Luxottica a significant cost advantage over its competitors, allowing it to reduce prices and undercut its competition.A second attribute to the computerization was its ability to make small production runs more efficient, this helped the company adapt to the ever changing fashion trends that govern the industry.Their ability to quickly adapt to the market defines them as an elastic supplier, allowing them to take advantage of changes in the markets demand.

Economy of Scale

Luxottica is an international giant, with sales of over $900 million in 2011 and a profit of $237 million. Luxottica uses its size to lower its production costs to levels that very few other firms can compete with. The industry is nearly a monopoly because it’s virtually impossible for new firms to enter the industry and compete with the low costs of production costs and established infrastructure. Luxottica has 256 million in PPE in 2011, which it uses to specialize production and increase efficiency. Luxottica’s large market share of the glasses retail market also increases their control of the market and price.

Extent of Monopoly

The following is a break down between Luxottica and its closest competitor.Luxottica has a share price that is $30 higher, nearly four hundred million more shares and a much larger market capital.(Finance, Safilo Group SpA , 2012 )(Finance, Luxottica Group SpA (ADR) , 2012 )

Luxottica still holds a monopoly over the sunglass market, unfortunately due to an increase in cheap overseas labour, their effective pricing strategy has lost its competitiveness.They still hold a strong grasp on the licensing agreements with individual designers, giving them a strong hold over the market.With their size and financial power, they are the most formidable force in the sunglass market.